March 2010 - Plain English policies - are they achievable?
Late last year, I was asked by one of the insurance magazines to provide my views on plain English insurance policies.
I made the following statement:
“Ideally, insurance policies would all be written in plain English and be sufficiently clear for an insured to understand. However, reality is different. Insurance is a complex product and it is a legal contract.
“Policies must define the scope of cover so an insurer can charge an appropriate premium for a risk that is understood by all parties.
“Insurers cannot make open-ended promises about what they will pay for if an insured event occurs. An insured event needs to be defined - insurers cannot price the risk if there is no understanding of what that risk really is. That means conditions (exclusions, limits etc) must attach to the policy.
“It’s important to distinguish between domestic and commercial policies, which the Insurance Contracts Act does. The Act describes certain policies as domestic, eg motor vehicle, home & contents, sickness and some travel insurance, where terms are specified by the Act and the regulations. The Act provides that, with other contracts, the insurer must bring unusual terms to the insured’s attention before a contract is entered into.
“It can be assumed that a corporate insurance buyer is likely to have a better understanding of the product being purchased and is more than likely going to use the services of a professional insurance broker in the transaction. It is a broker’s responsibility to explain the nuances of the policy to his/her client.
“Brokers are not so active in the domestic market and many purchases are made online. For many personal lines buyers, I question how many people actually read (and understand) their policy at purchase, instead trying to decipher it when an event occurs. The courts have said that an insured is deemed to have read policy conditions after receiving the policy document.
“The number of homes that are underinsured suggests people do not know of the existence of the average/co-insurance clause or do not understand its implications.
“Despite the fact the Insurance Contracts Act proscribes some terms of domestic contracts, it remains difficult to achieve common terms, such as flood cover. The Insurance Council tried to achieve a common definition of flood cover, but was rebuffed by the ACCC.
“The industry has certainly made excellent advances in recent years on the provision of “plain English” policies and I believe that has made them easier to understand and therefore less liable to be a source of complaint if a claim occurs.
“But I expect if you had surveyed people before, say, the Victorian bushfires, and asked those who had bought insurance if they were fully covered if their house burned down, many would say “yes” or “I don’t know”. Reality is, underinsurance was rife.
“The Insurance Code of Practice requires insurers to find ways to pay claims, not avoid them and, in my experience, insurers follow the code and look for ways to pay claims. In fact, in some disasters, they go beyond what their legal requirement is, eg after Cyclone Larry, many insurers paid clients more than their entitlements. However, insurers also have an obligation to shareholders.
“The answer lies in education to ensure people do understand the insurance transaction and its implications. All insureds are encouraged to read their policy document when they receive it and, if they don’t fully understand it, discuss it with their insurer, broker or adviser. AILA’s role is education within the industry and the association plays a role through educating those who advise on policies with the hope of achieving a more consistent approach.”
I would be interested in hearing the views of AILA members on the clarity of policies and welcome a robust debate via AILA News. Please send your views as a letter to the editor. Email them to firstname.lastname@example.org.